Federal Panel Destroys U.S. Inventors’ Property Rights

SCOTUS to rule on constitutionality of Patent Trial and Appeal Board

Bassam Abraham and Roman Chistyakov, two Boston-based engineers, in 2002 created a new technology for depositing metals at the micro scale. It had wide-ranging applications, from microchips to shaving razors. The two men, joining a longstanding American tradition stretching back to the signing of the Constitution, filed patents for their invention. Then their technology drew the attention of several massive, Fortune 500 companies, whom Abraham and Chistyakov would end up taking to court for allegations of patent infringement.

In response, those same Fortune 500 companies brought Abraham and Chistyakov's patents in front of an entity called the Patent Trial and Appeal Board (PTAB)—an "administrative law court" where a panel reviews challenges against patents previously issued by the Patent and Trademark Office (PTO). For just ten patents Abraham holds the PTAB received some 125 petitions, he said, challenging a total of 371 claims (patents are divided into "claims"). He noted that those same patents had been granted after review by six different examiners at the PTO.

"I never thought in a million years that we would lose all 371. I said, okay, maybe the patent office made mistakes on 50 percent of them. Let’s lose 150. And let’s see whatever we're left with, whether or not there is infringement," Abraham said.

The PTAB panel returned its results: of 371 claims challenged, it invalidated all 371. Abraham's patents, along with the 25-person company he and Chistyakov had grown based on them, were toast.

"It's pretty much destroyed our business. We're a very small company. We had people, we had to lay them off. And we're just limping," Abraham said.

"We had people that nobody would hire. They would go in the system. They'd be collecting unemployment. I have people that are 59 years old. No one would hire engineers, saying they're expensive, they're overqualified, anywhere they go. And we would hire them. And we had to lay them off. We had to lay off most of the people. We lost almost 90 percent of our workforce."

Abraham and Chistyakov's story is far from unique. The two men are part of a group of 39 private citizens, inventors and patent holders all, who have put their names on an amicus curiae brief in Oil States v. Greene's Energy, a case scheduled to appear before the Supreme Court later this term.

Oil States, in addition to ruling on the constitutionality of the PTAB, will address the Board's high rate of invalidating patents—more than 19,000 over its six years of existence. The Court also will examine the PTAB's procedure, which one expert described as "stacked" against patent holders, and which the claimants in Oil States say runs afoul of the Seventh Amendment. Critics of the PTAB hope Oil States will help rein in what they believe to be an example of the administrative state's excesses—one that damages American inventors' property rights.

One of the concerns motivating the AIA was the existence of so-called "bad patents," patents issued erroneously by the PTO, especially to "non-practicing" companies, commonly known as "patent trolls." These companies exist for the purpose of registering patents and then extracting payments from legitimate enterprises that would rather settle than spend huge sums of money on litigation.

Fears about bad patents are not unreasonable. A scholarly paper from 2008 alleges that the PTO had become a "rubber stamp," with concerns about overworked patent employees signing off on increasingly silly patents—for example, patent no. 6,025,810, "method to send a signal faster than the speed of light," or patent no. 6,213,778, "method of painting using a baby’s butt."

This is partially a function of the sheer number of patents filed: in 2015, some 629,647 were filed, a more than 200 percent increase from 20 years prior (the same 2008 paper found approximately 75 percent of all patent applications result in at least one patent). The tech bubble of the 1990s, when lots of overbroad patents were issued for poorly understood technology, also contributed to the problem.

"There were a lot of really bad internet patents issued in the late '90s that became the kind of nuisance patents that fueled the patent trolling fifteen years later," explained Daniel Drazer, the Mark Cuban Chair to Eliminate Stupid Patents at the Electronic Frontier Foundation (EFF). The EFF has used the PTAB to challenge at least one over-broad patent, disputing what was essentially a patent on the concept of a podcast.

Once a bad patent has been issued, challenging it — and, in many cases, the patent troll who holds it — in federal court is a complex and arduous process. The goal of the AIA in creating the PTAB was to streamline this process, creating a comparatively inexpensive and speedy way to eliminate bad patents.

"The PTAB was created by Congress to invalidate patents that the Patent Office had issued. And in doing so, it created an institution that has no structural limits imposed upon it in how it reaches that result," explained Adam Mossoff, a professor of law at the Antonin Scalia Law School.

This lack of structural limits is the defining feature of the PTAB. The design of its proceedings tilts the playing field overwhelmingly against patent holders and towards invalidation.

PTAB hearings are a litany of questionable procedures. They have much lower evidentiary standards for showing a patent might be invalid than federal court proceedings — a "preponderance of evidence," as opposed to "clear and convincing" evidence. Patent judges are instructed to consider the "broadest reasonable interpretation" of a patent, instead of the "best reasonable interpretation" (patents are often struck down for being overly broad, and therefore unpatentable). Patent holders are not able to clarify their claims before the PTAB, a right they are guaranteed in the AIA. Even if a patent is found valid in federal court, it can still be struck down by the PTAB.

"The agency stacked the administrative rules in such a way because there was an understanding based on the law that they were supposed to strike down a lot of patents. There are lots of patent practitioners who say the only explanation for the stacking of the various rules against patent holders is sort of a master plan to get rid of a lot of patents that have been issued recently," explained Alden Abbott, the Rumpel Senior Legal Fellow at the Heritage Foundation.

This would help explain the high rate of invalidation for PTAB review. Depending on the method of review to which the patent is exposed, between 64 and 98 percent of patent claims are invalidated. Only 4 percent of all PTAB petitions end with a final decision in which the whole patent is upheld. Recent statistics, published by the PTO, show that the PTAB has invalidated more than 19,000 claims. This is why Randall Rader, former chief judge of the U.S. Court of Appeals for the Federal Circuit, once called PTAB tribunals "patent death squads."

The ease with which entities can challenge patents in front of the PTAB increases the number of cases heard. Unlike in a court case, where claimants require a financial stake in the outcome of a case (what is called "standing"), anyone can challenge the validity of a patent, and there is little to stop a claimant from burying a patent holder in numerous claims.

What this means is that any of a number of malicious entities can go after someone’s patent: patent trolls, but also competitors, unions trying to protect their members’ interests, even political organizations which oppose the very concept of patent rights to begin with. Sometimes, Abbott said, investors will short a company’s stock, then challenge its patents in front of the PTAB, knowing that the mere fact of the challenge will send market prices plummeting.

"Basically, anyone can go to PTAB and say, I want to challenge a patent. They don't have to show they’re a competitor or user of the patent, they don’t have to show economic interest," Abbott said.

Nazer, of the EFF, thinks these concerns are misplaced.

"I think blaming the PTAB is a little bit like blaming a doctor for the fact that a lot of sick patients come in the front door of the emergency room. It's there for that reason," he said, alluding to the profligacy of bad patents in the system as the underlying sickness.

He pointed out that patent examiners, like those who looked at Abraham’s patent, only get about eighteen hours per patent, which is not nearly enough time to familiarize oneself with the whole universe of "prior art" (evidence that an invention may have already been patented). Patent holders' objections, Nazer said, are "sour grapes" in response to the complexity of actually having a novel idea.

"The question of whether an invention is really new is an extremely difficult one to answer well, and it is no surprise and no great criticism of the examiners that they don't get the answer right all the time, because they're asked to perform an extremely challenging task in a very small amount of time," he said.

The EFF expects to file an amicus brief in support of the respondents and the PTAB in Oil States. Mossoff, along with 26 other professors of law, is already signed a brief in support of the plaintiffs.

Bursting a Patent-Holder's Balloon

Nazer’s objections are unlikely to hold water with Josh Malone, another signatory to Abraham’s amicus brief. Malone is the inventor of "Bunch o Balloons"—a self-tying, self-filling, water balloon system. Bunch o Balloons took off, with hundreds of orders and interviews with "Good Morning America" and the "Today" show; Malone fondly recalls a water balloon fight with Carson Daly in Times Square.

Then Telebrands, a producer of "as seen on TV" products, rolled out a knockoff version of Malone's invention. Malone responded by taking Telebrand to federal court, where he won a preliminary injunction. Telebrands in turn went to PTAB. That board, in spite of the federal court’s finding, voided several of Malone's eight patents (litigation is ongoing).

Malone estimated that his ongoing legal battle has cost him one to two million dollars in legal fees thus far, and is unlikely to let up—the most recent claim filed against his IP was just weeks ago.

"The public thinks that means something—if you get a patent from the patent office, you've arrived! You're a true inventor! And it’s clear to me now it’s not worth the paper it's printed on. You can put it in a frame and hang it on the wall, but it’s worthless in terms of protecting your invention," Malone said.

Malone compared the process unfavorably to the lack of protection for inventors in China.

"When I was filing patents for Bunch o Balloons, [people said] ‘don’t bother filing to China,' because you can't enforce patents in China. Here we are three or four years later, and that's the first place I would file, and I would just ignore the U.S. until they figure out if they want to have a patent system or not," Malone said.

PTAB Before the Courts

Nominally, Oil States concerns a conflict between two oil and gas services companies: Oil States Energy, LLC and Greene's Energy Group, LLC. The dispute comes down to a patent on a specialized tool for fracking. Greene took the patent dispute in front of the PTAB, which unsurprisingly struck down Oil States's patent claim.

The case made its way through the federal court system, and up to the Supreme Court. Of the three constitutional issues proposed by Oil States's representation, the Court chose to focus on one in its certiorari grant. Specifically, the Court’s eventual hearing will center around "whether inter partes review—an adversarial process used by the Patent and Trademark Office (PTO) to analyze the validity of existing patents—violates the Constitution by extinguishing private property rights through a non-Article III forum without a jury."

There are several competing concerns here, all of which revolve around the central question of the constitutionality of the PTAB.

Patent rights, although they are not rights to material things like land or goods, are still regarded in U.S. law as property rights. As the original request for review noted, "Patents create property rights, protected by the Constitution. Once a patent is granted, … ‘[i]t has become the property of the patentee, and as such is entitled to the same legal protection as other property.'"

The Seventh Amendment guarantees a jury trial in essentially all civil cases, the sort of case a patent-related trial has historically been considered to be. However, PTAB hearings have no juries, only a panel of "judges" appointed by the Director of the PTO. The question thus becomes: were inventors like Malone and Abraham deprived of their property unconstitutionally by the PTAB? If so, an executive agency might be unilaterally depriving Americans of property rights.

A Brake on the Growth of the Administrative State

A second complicating factor is at issue in Oil States. The cert grant raises concerns about PTAB being a "non-Article III forum"—Article III being the section of the Constitution that sets up the judicial branch of government. The PTAB is what is called an "Article I court," so-called because it is constituted separately from the federal court system organized under the instruction that the "judicial power of the United States" shall be invested in the Supreme Court and "inferior courts."

Such Article I courts—often also called administrative law courts—act like their Article III cousins, but cannot technically be invested with the "judicial power," because they exist external to the federal court structure. This raises important questions about whether such "courts" can constitutionally deprive a person of his property rights.

A ruling against the administrative law court system in Oil States would be seen as a curtailing of the administrative state. Constitutional scholars and senators alike have cited the administrative state's ascendance as a threat to good governance in America.

For now, Mossoff says, America's history of innovation hangs in the balance.

"People like Thomas Edison, and Charles Goodyear, Samuel Colt, Nicola Tesla, the Wright Brothers. These are the people who relied upon the patent system. These are the people who are now being told, the moment you are successful, you will be immediately harassed and subjected to millions of dollars in cost in defending your patents against the people who are trying to take them out so they can copy your ideas for free," Mossoff said.

The Supreme Court is expected to officially hear oral arguments in Oil States at the end of November.

Charles Fain LehmanEmail Charles | Full Bio | RSSCharles Fain Lehman is a staff writer for the Washington Free Beacon. He writes about policy, covering crime, law, drugs, immigration, and social issues. Reach him on twitter (@CharlesFLehman) or by email at lehman@freebeacon.com.